“While a deal remains the Chinese government’s desired outcome, we think China’s hawkish tone since May has suggested a shift in thinking from being more willing to compromise to preferring to hold its ground and defend its bottom-lines”, Barclays Jian Chang wrote over the weekend, in a short piece documenting her outlook for this week’s hotly-anticipated meeting between Donald Trump and Xi Jinping at the G20.
That raises an interesting question – namely: Did the combination of Trump’s abrupt tariff escalation in early May and his subsequent decision to blacklist Huawei effectively force Beijing to resign themselves to the fact that they are dealing with an irrational actor who simply cannot be trusted? If so, has China decided that, barring convincing signals from the US side, a protracted trade war is now inevitable? More to the point: Is there no way back? Have we truly crossed the Rubicon?
Those latter two questions are probably a bit hyperbolic. Deescalation is still possible, but as Barclays goes on to write,”the blacklisting of Huawei on 15 May was a wake-up call and China is preparing for a ‘long march’ at the same time as it remains open to talks, provided the US will show some sincerity”.
Of course, the US side claims the Chinese side backtracked on its commitments, but Beijing vigorously denies this. China has variously insisted that one cannot “backtrack” on a deal that was never signed – that “commitments” aren’t “commitments” until an agreement is finalized. Trump would probably agree were he in their shoes.
Trump continues to insist that China “has to get a deal” because they’re “paying hundreds of billions of dollars”. That is a flagrant lie. It’s a testament to the so-called “post-truth” era in the US that the White House continues to get away with pushing manifest falsehoods about how tariffs actually work. The administration is aided and abetted in that effort by conservative media and even by right-wing blogs of an economic persuasion who, despite having spent years delving into the furthest reaches of international finance, seem suddenly unwilling to explain the reality of simple macroeconomic concepts to readers.
It’s possible China’s view is completely counter to that which Trump ascribes to Beijing. As Barclays goes on to write, “China may believe it has managed to get the US back to the table with its determination and ability to ‘prepare for war'”.
Indeed, Trump may discover that, very much contrary to the notion that China now “wishes they had taken” the deal that was on the table, Beijing will demand a better deal with the US elections looming. “China may think Trump is under greater domestic and international pressure and is running against time, hence may be more eager to strike a deal and hence China may be less willing to make more concessions”, Barclays contends, adding that “the terms China is willing to offer for the deal, if there may be one, could be worse than what China had agreed before Trump’s 5 May tweets.”
As far as markets are concerned, most observers think a repeat of the handshake agreement struck in Argentina in December is the most likely outcome, with both sides agreeing to postpone escalations as talks resume. Few expect a broad agreement, but not many people see a complete failure either. Here are some possible outcomes from the Barclays note:
It’s unclear how Trump would ultimately react were China to express reluctance to fully reengage. It appears Beijing hasn’t quite reached their breaking point with the administration, but the unreliable entities list, the FedEx investigation and the ongoing stimulus rollout suggest they’re getting close. Another episode that finds Trump doing something like, for instance, shaking Xi’s hand while simultaneously arresting a high-profile Chinese executive (remember, Meng Wanzhou was detained in Canada on the same night Trump and Xi dined in Buenos Aires) could be a bridge too far. And, as multiple analysts have noted over the past two weeks, Trump’s threat to slap Mexico with tariffs could be a sign to other countries that striking a deal with the US won’t necessarily deter the administration from escalating things anew in the event Trump believes he can score some political points with his base by doing so.
After the failed Hanoi summit with Kim Jong Un, Trump explained that “sometimes you just have to walk away”. One wonders how he would respond if the Chinese simply turned their backs on him and told him to twist in the wind until the election.
Is that likely? No. Beijing does need a deal of some kind and Trump is probably correct to suggest that companies will begin to shift production out of China if things get worse.
But make no mistake, China is most assuredly in a better position to play the long game than Trump. That is of course unless he does away with term limits so that he, like his “good friend Xi”, can be “president for life”.